How to Choose the Best Home Loan?
Choosing a mortgage has become more and more difficult as the lending industry becomes increasingly competitive and complex.
Home loans are available in many different variations. There are introductory, fixed and variable rates offered by hundreds of lenders, with interest-only or principal & interest (P&I) repayment methods. The fees and features offered by each lender differ and there are a multitude of variations available to suit your needs.
First-time buyers have to go into the process armed with the knowledge, in terms of repayments and features, of what will suit their circumstances.
They should also know how to compare loans and where to look to get an overview of the market.
The golden rule is to consider the whole package offered and not to look at one aspect in isolation. If a loan has a very low interest rate, the chances are the fee structure is high. Similarly, if there are lots of features attached to the loan, you’ll usually pay for them via higher interest rates or more fees.
Michael Tsoa-Lee, director at Mates Rates Mortgages, believes structure is all-important. “Structure is the first thing to get right before you choose your rate or lender,” he says.
In order to get the right loan, it’s also important to ask yourself what your finance needs are and what features you really need, says Michael Cant, executive general manager, retail products with Commonwealth Bank.
“Depending on whether you’re a first homebuyer, second homebuyer, are self-employed or thinking about renovating, refinancing or investing, your loan needs to accommodate your individual circumstances. If you’re buying your first home, your loan needs to be easily manageable, especially in your first year. Home loans have many different features, and it’s important not to judge a home loan solely on the interest rate and upfront establishment fees.”
Another structural point to consider is the size of deposit you can afford. Most mortgage providers will only lend 80% loan to value ratio (LVR) unless you’re willing to pay for lenders mortgage insurance (LMI), which can cost up to several thousand dollars. There are lenders who’ll provide up to 100% LVR without LMI, but it will usually mean a higher interest rate or greater fees.
When you’ve decided on the deposit, you can isolate the home loans that best suit your needs.
Not every feature available in a loan package will suit your needs, but the more flexibility you can achieve the better? Especially if your individual circumstances change.
Paul Bonaventura, general manager of Austral Mortgage Corporation, advises that you look for the ability to make additional repayments at no extra cost and the ability to make repayments via direct debit, ATMs, internet and phone banking services.
“It’s also worth checking if you can re-fix your interest rate at no extra cost or split your loan to suit your situation. Other features to bear in mind are offset accounts and loan portability,” Bonaventura says.
Bonaventura suggests researching a lender and asking a few questions before deciding on a loan.
“Find out as much as you can about them either from their website or by word of mouth. Often the best way of finding the right lender is from someone who already deals with them and recommends them.”
Bonaventura adds that you should also ask about how post-settlement issues are handled. Does the lender have customer service consultants readily available or are these matters dealt with by a call centre or message service?
“Having ready access to decision makers can save you time and a deal of stress down the track,” says Bonaventura.
Many first homebuyers are confused and overwhelmed by the huge array of home loans available. They are often left feeling bewildered and unable to make an informed decision.
To overcome this, you’ll need to make a loan transparent, and understand all the costs and benefits before choosing.
Bonaventura says the best way to do this is simply to ask for them. “Lenders are obliged to provide and explain the nature of this information.” he says.
When meeting up with a lender, Tsoa-Lee suggests that you ask about the total fees associated with the mortgage.
“Ask what fees are likely to be payable, not just what are payable. Most people move out of their loan after three to five years, so you need to ask what costs are charged when exiting between the third and fifth years. You must ask them to set out all the fees? If you say exit fees, they may not tell you about discharge, break or settlement fees. This is where you have to be very particular with your questions.” he advises.
If you shop around, it’s possible to find lenders with good rates, low fees and flexibility. What a lender offers you the first time isn’t necessarily their best offer.
Many competitive loans these days don’t have any application fees. It’s important to ensure the rate and ongoing fees are also competitive, and check whether there are any hidden fees such as settlement, valuation or legal fees.
Comparison rates help consumers identify the true cost of a loan. It’s the rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.
Bonaventura suggests that a comparison rate can be a very handy tool in understanding the
true cost of a loan.
“Consumers should always take note because while a bank or financial institution may advertise what appears to be a very low rate, the comparison rate represents a ‘truer’ rate for want of a better word,” he says.
“Therefore, a competitor with a higher advertised rate and a lower comparison rate could be a cheaper option over the term of a loan.”
Tsoa-Lee says that comparison rates are useful, but warns homebuyers to be wary of comparison rate polishing. Comparison rate polishing is when the lender only includes set fees in the comparison rate calculation and may introduce variable fees on top of this.
“They’re a good starting point, but the risk of comparison rates is that they do get polished ?you need to know the exact structure of your loan and compare that information, otherwise you’re barking up the wrong tree,” says Tsoa-Lee.
If you’re unsure that you can find the best deal without advice, then you might consider using a broker.
There are hundreds of brokers across the country and most have access to a wide variety of loans and have the experience to ask the right questions of lenders.
“Brokers are useful to help you get the structure right,” says Tsoa-Lee. “The challenge is choosing the right broker.
“They should work out the structure with you, then give advice on a range of loans. They would then work through each lender until they find something you’re comfortable with”, he continues “Before you contact a broker, check they’re registered with the Australian Securities & Investments Commission.”
Top Home Loans
Home loans are no longer just about signing up for 25 years and making regular loan payments – nor even just about trying to pay off the mortgage as quickly as possible. Flexibility and peace of mind are just as important, and there are a range of loan options that offer such benefits. However, these extras can cost money, and the key feature is still the interest rate.
Types of Home Loans
There are three main types of home loans:
1. Basic Loans
These are no frills loans with few features and a low interest rate. May offer redraw but there can be restrictions and fees so a basic loan may not suit you if you want to make extra repayments and access them later.
2. Standard Loans
These offer more flexibility than basic loans, you can redraw any extra money you’ve paid in, for example, and have the option to switch to a fixed rate, or split the loan into a fixed and variable portion. They also often offer a 100% offset account. “An offset account is a great option because then you can put your savings and even your salary towards the loan, every cent counts,” says Mitchell Watson, Research Manager from CANSTAR. But this comes at the cost of a higher interest rate.
3. Home Loan Package
A home loan package is a standard loan with an interest rate discount of up to 1.2% depending on your loan amount, cheaper than many basic loans. The package normally includes a free transaction account and no annual fee credit card. However, high package fees apply of up to $400 per year.
With some great rates around at the moment there’s a lot of competition between lenders, so don’t be shy to ask your bank for a better deal.
“Even negotiating, say half a per cent lower rate on a $300,000 home loan over 25 years can save you almost $90 per month and more than $25,000 over the life of the loan,” says Justine Davies, CANSTAR Finance Editor. “Alternatively, if you negotiate a lower rate and keep your monthly repayments at the original level, you can potentially knock years off the life of your loan. That’s money for nothing; it’s money that some borrowers are currently handing their financial institution on a silver platter.”
Fixed or Variable
At a time of historical low interest rates, low fixed rates sound tempting. But they can come with the downside of reduced flexibility. High break costs apply if you want to repay the loan early or relocate and you are often not allowed to make extra repayments.
While the RBA kept rates steady in 2014, it is very hard to predict if you’ll save with a fixed rate over the next three or five years. “We had a look back over the last 20 years and we found you had a 50% chance to be better off with a fixed rate loan,” says Watson.
Ask yourself if you can afford higher rates, if not, fixing at least part of the loan could be a good option for you. A split loan offers the best of both worlds allowing you to make extra repayments in the variable portion of the loan and still giving you the security of a fixed rate.
Watch the Fees
Interest rates are just one of the costs to consider. You should also check the regular fees and charges. Fees and establishment costs can make a big difference to the amount you pay for your mortgage.
The comparison rate takes into account these charges, making it easier to compare loans.
Some common fees include:
- Application fees: lenders may charge an upfront establishment fee and application fee. Ask the lender to waive these fees, or at least try to negotiate a discount.
- Valuation fees and lender’s legal fees: lenders may also charge for a valuation of the property. If you’re concerned you may not meet a lender’s income requirements for the loan, ask them to check first, before going ahead with the valuation, as you may have to pay for the valuation even if your loan doesn’t get approved.
- Lender’s mortgage insurance (LMI) can apply if you don’t have an 20% deposit, and it can cost you thousands of dollars. It doesn’t insure you but rather the lender (in case you default on the loan). It doesn’t even absolve you from the debt – the insurer can chase you for it. Try to have as high a deposit as possible; even a small difference in the deposit can make a difference in the LMI cost.
- Monthly or annual fees: high ongoing fees can have an impact on how fast you can pay back the loan.
- Break costs: fixed-interest loans can have high exit fees, especially if the variable interest rate is lower than the fixed rate you’re paying. If you want to get out of the mortgage, you may have to make up all the ‘lost’ interest the bank would have made if you’d paid the higher rate through to the end of the fixed term. This is called the ‘break cost’.
- Extra repayments: Some loans – particularly those with a fixed interest rate – may limit the amount you can pay without getting charged a break fee.
- Redraw facility: With many loans, if you make extra payments you can get the money back later. This can have considerable tax advantages and provide useful security as you can store your savings in your mortgage. Some redraw facilities are much easier to access than others – check whether you’ll be required to apply in writing, how long it might take for approval to come through, and the costs involved.
- Repayment holidays: Some mortgages allow you to take a ‘repayment holiday’ for a short period such as six months, for example if you’ve just had a baby. Check the conditions, as sometimes you can only make use of this features if you’ve made extra repayments, or you may have to make higher repayments after the repayment holiday to make up for it.
- Interest only: Paying interest-only can be a useful feature for investors. It’s usually available for five years but some loans offer it for up to ten years. It’s risky though, as generally you’d want to pay back the loan as quickly as possible to minimise interest charges and avoid owing more than the property is worth in case of a market downturn.
- Mortgage offset accounts: You deposit money into an account and instead of receiving interest on it, you receive a reduction in the interest due on your loan. Because offset accounts don’t actually pay you any money, they don’t add to your taxable income – so, like redraw facilities, they offer tax advantages.
If you want to buy or sell a home, land or investment property you’ll have to sign a contract. The legal work involved in preparing the sales contract, mortgage and other related documents, is called conveyancing. It’s possible to do your own conveyancing, however, most people get a licensed conveyancer or solicitor to do the work for them. This fact sheet explains what is involved with conveyancing.
Who Can Do Conveyancing Work?
Three options for doing your conveyancing are:
- Using a licensed conveyancer
- Using a solicitor
- Doing it yourself
Before you start organising your conveyancing, it’s important to do your homework first.
Who Can Do Conveyancing Work?
In NSW, conveyancers must be licensed with NSW Fair Trading. Most conveyancers hold an unrestricted licence that allows them to perform the full scope of conveyancing work for residential, commercial and rural property. Conveyancers are licensed to do legal work such as preparing documents, giving legal advice on contracts and explaining the implications. Before you decide to use a particular conveyancer, check if they are licensed with us first.
To find a conveyancer, look them up in the Yellow Pages under ‘Conveyancing Services’ or call one of the professional associations under the heading ‘Need more information? below.
Licensed conveyancers must have professional indemnity insurance to protect you in case they make a mistake or are negligent in their work. If they are dishonest with the money you have entrusted to them, you may have access to the Compensation Fund administered by Fair Trading. For more information about the fund, go to the Property Services Compensation Fund page on the Fair Trading website.
QUICK TIP – If you want to complain about a conveyancer, call Fair Trading on 9895 0297.
Using a Solicitor
While conveyancers and solicitors are equally qualified to do conveyancing work, solicitors can also give you legal advice about other matters.
Solicitors, like licensed conveyancers, must also have professional indemnity insurance for your protection.
To find a solicitor who does conveyancing:
- Look up the Yellow Pages (under ‘Conveyancing Services’)
- Call the Law Society of NSW on 9926 0333
- do a search for specialists in ‘property law’ in your local area using the ‘Find a Lawyer’ page on the Law Society’s website http://www.lawsociety.com.au
QUICK TIP – To complain about a solicitor call the Legal Services Commissioner on 9377 1800 or 1800 242 958.
Doing Your Own Conveyancing
Doing your own conveyancing can be risky because you can’t get the same insurance available to a licensed conveyancer or solicitor. This means that if you make a mistake you are responsible and there’s nowhere you can go for financial compensation. For example, your solicitor or conveyancer may fail to make sure the vendor has disclosed everything they are legally required to, such as an order to demolish the place. If you suffer loss as a result of this negligence you may be able to take action against them – that’s the difference!
You can search for a do-it-yourself conveyancing kit online.
CAUTION – If you do your own conveyancing you are effectively taking on all the responsibility without insurance against making mistakes. So make sure you know what you are doing.
The Conveyancing Process
The conveyancing process can involve the following steps:
- Arranging building and pest inspections.
- Examining a strata inspection report if the property is part of a strata scheme.
- Arranging finance if necessary.
- Examining and exchanging the contract of sale.
- Paying the deposit.
- Arranging payment of stamp duties.
- Preparing and examining the mortgage agreement.
- Checking if there are outstanding arrears or land tax obligations.
- Finding out if any government authority has a vested interest in the land or if any planned development could effect the property (eg. local council, Sydney Water, Roads and Traffic Authority).
- Finding out any information that may not have been previously disclosed such as a fence dispute or illegal building work.
- Calculating adjustments for council and water rates for the property settlement.
- Overseeing the change of title with the Land and Property Information NSW.
- Completing any final checks prior to settlement.
- Attending settlement.
IMPORTANT – Before the conveyancer or solicitor starts the work it is important for you to have a realistic idea of how much it will cost. The best way to do this is to ask for an itemised statement of the likely costs.
Fees will vary between solicitors and conveyancers as there is no official charge for conveyancing. In addition to a legal service fee you will usually be charged for ‘disbursements’.
These can include:
- A title search.
- Certificate fees charged by authorities with responsibility for water, electricity, roads, schools etc.
- Registering the mortgage.
Costs other than legal fees and disbursements will usually include:
- Building and pest inspections.
- Survey report.
- Establishment of mortgage.
- Home building insurance.
- Valuation fees
- Mortgage insurance.
- Stamp duty and mortgage duty
- Council and water rates.
Legal practitioners and conveyancers are required to disclose their costs to clients, including the clients’ right to negotiate a costs agreement, receive bills and be advised of changes, among other things.
Need More Information?
Australian Institute of Conveyancers NSW Division
Tel: 9633 1355
The Law Society of NSW
Tel: 9926 0333
The Office of the Legal Services Commissioner
Tel: 9377 1800 or 1800 242 958
Home Purchase Advisory Service
Tel: 1800 806 653